Long-Term Disability Claims and Workers’ Compensation Claims—Proof Issues:
Presented in Chicago, Illinois at the annual AAJ Meeting
WORKERS’ COMPENSATION AND WORKPLACE INJURY SECTION AND
WORKERS’ INJURY LAW AND ADVOCACY GROUP
By Jonathan M. Feigenbaum, Esquire
Phillips & Angley
One Bowdoin Square
Boston, MA 02114
JonF@phillips-angley.com
617-367-8787
Introduction
You are representing a client in a workers’ compensation claim. You learn that
the client was provided long term disability benefits insurance through the employer.
Now you have an opportunity to recover additional income or benefits for your client.
You must examine the benefits and detriments of seeking long term disability coverage
for your client with great care.
You read the disability insurance policy or plan for the first time. The document
seems simple, but yet very ambiguous. You say to yourself, “There must be something
more to explain this policy.” The language of disability insurance is often unclear and
open to broad interpretation. There is startling lack of uniformity of particular definitions
within disability insurance policies, and core provisions, can vary substantially. The harsh
reality is that you have stumbled into a complex and frequently disputed area of the law.
ERISA is not an area to experiment in or to “learn on the fly.” If you are new to
ERISA, or even if you are experienced, it is wise to confer with other attorneys who
consistently practice in this area. The pitfalls facing an ERISA claimant are never ending.
For the most part, the chances of achieving a successful result are determined long before
suit is ever filed. The pre-suit application for benefits or appeal of a claim denial will
shape the ensuing litigation. The ultimate success of your client’s claim will be shaped
early in the claims process.
You need to have a fundamental understanding of how and why ERISA litigation
is so different. This is the only way to map out a winning strategy.
On September 2, 1974 (Labor Day) Congress enacted the Employee Retirement
Income Security Act (ERISA). Although the statute uses the word retirement in its title,
ERISA governs both retirement benefits (pensions) and employee welfare benefit plan.
Those are benefits that private sector employers provide to employees; government
employees and those employed by churches are not subject to ERISA. Typical ERISA
governed employee welfare benefit plans, include, disability insurance; health insurance
or health plans, including those provided through Health Maintenance Organizations
(HMO); sometimes severance plans and other type of employee benefits. Retirement
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benefits are regulated under separate provisions of ERISA that are more protective of
employees than those pertaining to welfare benefit plans.
ERISA long term disability litigation is truly a creature of its own. Although
based in part on trust law, in part on contract law, and in part on disability insurance law,
ERISA long term disability litigation is like no other area of the law. As a creation of a
federal statute and federal common law, for the most part, ERISA has evolved from a law
enacted to protecting employees to a law that insulates long term disability insurance
carriers from suffering the consequences of engaging in even the most unfair and
underhanded claims behavior.
Long term disability claims are governed under ERISA section 502(a) (1) (B) of
ERISA, or 29 USC 1132(a) (1) (B). Other relief, which is rare falls under section 502(a)
(3) or 29 USC 1132(a) (3). Under section 502(a) (1) (B) claims are supposedly for
equitable relief only. This has been interpreted by Circuit Courts, but never directly by
the Supreme Court as precluding a right to trial by jury. For the most part, a trial of any
kind, other than a review of the insurance company’s claim file or cross motions for
summary judgment under a peculiar standard, rarely happen. Normal Rule 56 inferences
go against your client in most instances under ERISA.
ERISA fiduciaries have a duty to act prudently and with loyalty toward
participants in the plan. 29 U.S.C. § 1104(a) (1) (A) & (B). When fiduciaries (typically an
insurer) breach that duty, Section 502(a) (3) entitles plan participants (employees) to sue
them to redress the breach. 29 U.S.C. § 1132(a) (3); Varity v. Howe, 516 U.S. 489
(1996). The Supreme Court has described Section 502(a) (3) as a "catchall" clause that
provides a "safety net" to redress injuries that ERISA does not remedy under other
provisions. Id. at 512. Section 502(a) (3), however, expressly limits recovery to
"appropriate equitable relief." The Supreme Court, through a series of cases, has
concluded that this excludes "legal" relief. Great-West Life & Annuity Ins. Co. v.
Knudson, 122 S. Ct. 708, 713 (2002). Although last year, the Supreme Court further
confused its pronouncement on “legal relief” in under which the Court effectively
overruled portions of Great West by refusing to explicitly say so. Sereboff v. Mid
Atlantic Medical Services, 126 S. Ct. 1869 (2006).
The Broad Sweep of Federal Preemption under ERISA.
Insurance regulation had been the province the states. Insurers liked this. The
insurance industry sought to avoid federal regulation, and has been protected by the
McCarran-Ferguson Act since 1945. The McCarran-Ferguson Act was adopted in 1945
after extended controversy over the jurisdiction of state and federal governments in
regulating the business of insurance. The principal objective of the Act was to establish
the primacy of the states in regulating the industry. The purpose clause of the Act states
that the continued regulation and taxation of the business of insurance by states are in the
public’s best interests.
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Insurers also have a limited exemption from antitrust laws. This may be ending.
The charge is being lead by Senator Trent Lott of Mississippi who has had problems
post-Katrina in obtaining payment from his home owner’s insurer after suffering a
catastrophic loss to his home on the Gulf of Mexico.
With the enactment of The Employee Retirement Income Security Act of 1974,
state laws have been trampled. ERISA contains one of the broadest preemption clauses
ever enacted by Congress. The application of which has been repeatedly referred to by
the Supreme Court, a “‘comprehensive and reticulated statute,' the product of a decade of
congressional study of the Nation's private employee benefit system," Mertens v. Hewitt
Associates, 508 U.S. 248, 251, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993), effects almost
all aspects of the employer-employee relationship in the private sector. Its sweep effects
the payment of disability benefits to injured workers, whether in the form of a single
payment, or periodic payments. When Congress enacted ERISA in 1974, its focus was on
abuse and mismanagement of pension funds:
It is hereby declared to be the policy of this chapter to protect
interstate commerce and the interests of participants in employee
benefit plans and their beneficiaries, by requiring the disclosure and
reporting to participants and beneficiaries of financial and other
information with respect thereto, by establishing standards of conduct,
responsibility and obligation for fiduciaries of employee benefit
plans, and by providing for appropriate remedies, sanctions, and ready
access to the Federal courts. ERISA Sec. 2., 29 U.S.C. ' 1001(b)
In a number of seminal ERISA decisions, the Supreme Court has repeatedly
referred to the purpose behind ERISA, protection of employees, and then has proceeded
to gut the rights of employees and other beneficiaries. In the most recent major ERISA
decision, Aetna Health, Inc. v. Davila, 542 U.S. 200 (2004), the Supreme Court sided
with the HMO industry, rather than patients and their doctors, by concluding that ERISA
pre-empted state laws aimed at righting wrongs perpetrated by HMOs.
Congress enacted ERISA to "protect ... the interests of participants in employee
benefit plans and their beneficiaries" by setting out substantive regulatory
requirements for employee benefit plans and to "provid[e] for appropriate
remedies, sanctions, and ready access to the Federal courts." 29 U. S. C.
'1001(b). The purpose of ERISA is to provide a uniform regulatory regime over
employee benefit plans. To this end, ERISA includes expansive pre-emption
provisions, see ERISA '514, 29 U. S. C. '1144, which are intended to ensure that
employee benefit plan regulation would be "exclusively a federal concern." Alessi
v. Raybestos-Manhattan, Inc., 451 U. S. 504, 523 (1981). Aetna Health, Inc. v.
Davila, 542 U.S. 200, 208 (2004).
The genesis of this line of decisions evolved from Pilot Life Ins. Co. v. Dedeaux,,
481 U.S. 41 (1987). In that decision, the Supreme Court held that ERISA pre-empted
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virtually all state law claims, including Abad faith@ insurance claim arising under state
law. In Dedeaux, the Court first reiterated the need to protect employees’ and
participants’ rights. The holding of the Court, however, provided insurers with free reign
to engage in behavior that would not be tolerated under state tort laws:
[T]he detailed provisions of '502(a) set forth a comprehensive civil enforcement
scheme that represents a careful balancing of the need for prompt and fair claims
settlement procedures against the public interest in encouraging the formation of
employee benefit plans. The policy choices reflected in the inclusion of certain
remedies and the exclusion of others under the federal scheme would be
completely undermined if ERISA-plan participants and beneficiaries were free to
obtain remedies under state law that Congress rejected in ERISA. 'The six
carefully integrated civil enforcement provisions found in '502(a) of the statute
as finally enacted ... provide strong evidence that Congress did not intend to
authorize other remedies that it simply forgot to incorporate expressly.' "Dedeaux,
481 U.S. at 54.
In Dedeaux, the Supreme Court could have limited its decision, but chose not to.
It concluded that Congress had intended Section 502(a) to provide the exclusive remedy
for Aplan participants and beneficiaries asserting improper processing of a claim for
benefits and that varying state causes of action for claims within the scope of Section
502(a) would pose an obstacle to the purposes and objectives of Congress.@ The Court
concluded that Congress had intended to Adisplace entirely any state cause of action@ and
make any ERISA suit Apurely a creature of federal law.@
It is the fall-out from Dedeaux that makes ERISA the best friend of insurance
companies. Without the risk of Abad faith@ or exemplary or consequential damages, or
even having to face a jury trial, an insurer’s downside risk to engaging in bad conduct is
very minimal. It may be ordered to pay back benefits, plaintiff=s counsel fees, interest
and its own counsel fees. No other damages are permitted.
Background to Differing Burdens of Proof.
Plaintiff’s efforts to obtain full relief have been further hampered by the erroneous
importation of administrative law into ERISA welfare benefits litigation. Too many
Courts have been willing to analogize ERISA law with administrative law. The mistake is
that under administrative law, usually there is a fact finding neutral and a right to present
evidence and cross examine witnesses. In the typical ERISA welfare benefits claim, the
insurer serves as fact finder, judge and payor of the judgment, if any. The Seventh Circuit
Court of Appeals and Eleventh Circuit Court of Appeals both warned against this:
What may have misled courts in some cases is the analogy
between judicial review of an ERISA plan administrator's
decision to deny disability benefits and judicial review of
the denial of such benefits by the Social Security
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Administration.... Judicial review of the latter sort of denial
is of course deferential, and it is natural to suppose that it
should be deferential in the former case as well. But the
analogy is imperfect, quite apart from its having been
implicitly rejected by the Supreme Court in Bruch when it
determined that the default standard of review in ERISA
cases is plenary review, and quite apart from the fact that
the social security statute specifies deferential ("substantial
evidence") review. 42 U.S.C. § 405(g). The Social Security
Administration is a public agency that denies benefits only
after giving the applicant an opportunity for a full
adjudicative hearing before a judicial officer, the
administrative law judge. The procedural safeguards thus
accorded, designed to assure a full and fair hearing, are
missing from determinations by plan administrators.
Herzberger v. Standard Ins. Co., 205 F.3d 327, 332(7th Cir.
2000).
The warning of the Circuit Courts has gone unheeded, and seems to have been
forgotten by that very same court. See Semien v. Life Ins. Co. of America, 436 F.3d 805,
815(7th Cir. 2006) (Establishing an astonishingly high bar to obtain any discovery.).
A plaintiff=s avenue for seeking reasonable relief has been disadvantage by the
“suspension” of the Federal Rules of Civil Procedure (“FRCP”). Although the FRCP
have not been literally suspended, defendants have engaged in a masterful campaign with
a surprising rate of success convincing the federal judiciary that FRCP do not apply, and
therefore, plaintiffs are not entitled to seek discovery. Sandoval v. Aetna Life & Casualty
Ins. Co., 967 F.2d 377, 380 (10th Cir. 1992) (Court may consider only the evidence and
argument before administrator at time it made its decision; plaintiff cannot introduce new
evidence or arguments at trial).
In an early 2006 decision, the Seventh Circuit Court of Appeals concluded that
discovery was to be allowed only when: "Ya claimant must identify a specific conflict of
interest or instance of misconduct. Second, a claimant must make a prima facie showing
that there is good cause to believe limited discovery will reveal a procedural defect in the
plan administrator's determination.@ To make matters worse, that Court went further,
and without Congressional basis or federal common law precedent, concluded that
ERISA benefit claims are subject to the most minimal judicial review. Semien v. Life
Ins. Co. of America, 436 F.3d 805, 815 (7th Cir. 2006):
Congress has not provided Article III courts with the statutory authority, nor the
judicial resources, to engage in a full review of the motivations behind every plan
administrator's discretionary decisions. To engage in such a review would usurp
plan administrators' discretionary authority and move toward a costly system in
which Article III courts conduct wholesale reevaluations of ERISA claims.
Imposing onerous discovery before an ERISA claim can be resolved would
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undermine one of the primary goals of the ERISA program: providing "a method
for workers and beneficiaries to resolve disputes over benefits inexpensively and
expeditiously." Perry v. Simplicity Eng'g, 900 F.2d 963, 967 (6th Cir. 1990)
(internal citation omitted). While claimants who believe they are the victims of
arbitrary and capricious benefits decisions should feel free to seek relief in federal
court, trial judges must exercise their discretion and limit discovery to those cases
in which it appears likely that the plan administrator committed misconduct or
acted with bias. Id. at 815.
Nothing in ERISA states that regular litigation rules do not apply. However, over
time, and dramatically in this case, the Federal Judiciary has sought to limit an
employee’s opportunity to seek relief.
ERISA Litigation – The Standard of Review
Probably the most litigated issue in all ERISA claims is the standard of review in
Court. Whether a claim for benefits will be reviewed under the “arbitrary and capricious
standard” or sometimes called “deferential review”, or de novo review by the Court has
the greatest impact affecting the end result. Judges understand what it means to review
any type of decision. Just how much as decision can be reviewed “deferentially” is a
guess. Consequently, the majority of claimants lose when the litigation is reviewed
deferentially.
The nonprofit Families USA advocates expansion of the NAIC's Model to
Prohibit Discretionary Clauses to disability insurance contracts.... “The discretionary
clauses create an uneven playing field for consumers who want to file legal challenges
against an insurer's decision, according to Sonya Schwartz, an attorney and health policy
analyst for Families USA. These clauses give legal deference to the insurer's decision
unless the claimant can prove that the insurer's decision was unreasonable or irrational
(the "arbitrary and capricious" standard), which is a "very difficult standard to meet," Ms.
Schwartz noted. Claimants are much less successful in cases where the arbitrary and
capricious standard was applied (only 28% were successful) than they were in cases
involving "de novo" review (68% were successful). According to Ms. Schwartz,
"Prohibiting discretionary clauses in disability insurance contracts insures that courts will
apply the same standard of review as they do in other contract cases so that consumers
will get a fair, impartial review of their claim."
http://www.benico.com/News/News%20Updates/6-21-04.htm
A denial of benefits challenged under 29 U.S.C. § 1132(a) (1) (B) is reviewed de
novo "unless the benefit plan gives the administrator or fiduciary discretionary authority
to determine eligibility for benefits or to construe the terms of the plan," in which case an
abuse of discretion standard is applied. Firestone Tire & Rubber Co. v. Bruch, 489 U.S.
101, 115, 103 L.Ed.2d 80, 109 S. Ct. 948 (1989). For example, the First Circuit has
"steadfastly applied Firestone to mandate de novo review of benefits determinations
unless 'a benefits plan ... clearly grant[s] discretionary authority to the administrator,' "
Terry v. Bayer Corp., 145 F.3d 28, 37 (1st Cir.1998) (quoting Rodriguez-Abreu v. Chase
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Manhattan Bank, N.A., 986 F.2d 580, 583 (1st Cir.1993). If plan administrators are granted
such authority, an "arbitrary and capricious" standard of review will apply. See Recupero
v. New England Tel. & Tel. Co., 118 F.3d 820, 827 (1st Cir.1997). See, Dana M. Muir,
Fiduciary Status as an Employer’s Shield: The Perversity of ERISA Fiduciary Law, 2 U.
Pa. J. Lab. & Emp. L. 391 (2000). The standard of review correlates directly with a
person’s chance of success in overturning an unfair insurance decision. If the review is de
novo, rather than deferential, the odds of prevailing grow.
As the party advocating a deferential standard of review, or interchangeably
referred to as an “arbitrary and capricious” standard of review, the Plan Fiduciary bears the
burden of demonstrating that its adverse determination is entitled to such deference. Kinstler
v. First Reliance Standard Life Ins. Co., 181 F.3d 243, 251-52 (2d Cir.1999). “Despite the
holding of Firestone Tire, plan sponsors have been unaccountably loath to amend their
plans to make the delegation of discretionary authority unambiguously explicit. The result is
a plenitude of litigation contesting the standard of review to be applied in individual cases, with
claimants advancing inventive, if at times impervious, arguments for applying the friendlier
de novo standard.” Giannone v. MetLife, 311 F.Supp.2d 168, 174 (D. Mass. 2004). “If a
plan wishes to insulate its decision to deny benefits from plenary review, the surest way
to do so…is by including language that either mimics or is functionally equivalent to the
"safe harbor" language we have suggested: ‘Benefits under this plan will be paid only if
the plan administrator decides in his discretion that the applicant is entitled to them’.”
Diaz v. Prudential Ins. Co. of America, 424 F.3d 635, 637 (7th Cir. 2005).
Interfacing Long Term Disability Benefits and Workers’ Compensation Benefits.
What does the workers’ compensation attorney need to know from the outset?
Under a typical ERISA governed long term disability plan workers’ compensation
benefits are usually treated as “offsets” or “other income” and used as a means to reduce
benefit payments otherwise payable under the insurance policy or plan. The injured
person’s attorney must review the specific policy language in the disability insurance
plan or policy and devise a permissible method for assuring that the client’s interests are
appropriately protected. It is essential to review the actual policy language in the
insurance policy or the plan. Reliance on the Summary Plan Description (“SPD”) or
Certificate Booklet is ill advised. The Plan documents tend to exclusively govern
although inconsistencies with the SPD sometimes (depends on the Circuit) will ultimately
control.
The problem faced by the injured person is easily understood by actual example.
The following is policy language contained in a long term disability policy written by the
world’s largest disability insurer:
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MONTHLY BENEFIT
To figure the amount of monthly benefit:
1. Multiply the Insured's basic monthly earnings by the benefit percentage shown in the policy specifications.
2. Take the lesser of the amount:
a. determined in step (1) above; or
b. of the maximum monthly benefit shown in the policy specifications; and
3. Deduct other income benefits, shown below, from this amount.
But, if the insured is earning more than 20% of his Indexed pre-disability earnings in his regular occupation or another occupation, the following formula will
be used to figure the monthly benefit.
(A divided by B) x C
A = The insured's "indexed pre-disability earnings" minus the insured's
monthly earnings received while he is disabled.
B = The insured's "indexed pre-disability earnings".
C = The benefit as figured above.
The benefit payable will never be less than the minimum monthly benefit shown
in the policy specifications.
OTHER INCOME BENEFITS
Other income benefits means those benefits as follows.
1. The amount for which the insured is eligible under:
a. Workers' or Workmen's Compensation Law;
b. occupational disease law; or
c. any other act or law of like intent.
2. The amount of any disability income benefits for which the insured is
eligible under any compulsory benefit act or law.
For purposes of illustration, assume that John Doe earns $48,000.00 per year, or
$4000.00 per month, or $924.07 a week. Assume that Mr. Doe’s disability plan pays to
him 60% of his base monthly earnings - $4000.00 * .60 = $2400.00 per month. Now
assume that Mr. Doe receives workers’ compensation payments of $602.00 per week.
Under the above scenario, Mr. Does’ “offsets” will exceed his monthly disability
payment $602 x 4.3 = $2588.60. If Mr. Doe qualifies and receives Social Security
Disability Income payments, his payment under the long term disability plan will be
further eroded. Mr. Doe will probably receive some minimal payment under the plan,
may be $100.00 per month. Assume that Mr. Doe’s weekly worker’s compensation
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payment is only $400.00 per week. Under the above, $400.00 x 4.3 = $1730.00 per
month. His payment will be $2400.00 - $1730.00 = $670.00 per month from the
insurance carrier; much less than he probably expected that the carrier would actually
pay.
Would a reasonable employer pay premiums to an insurer if that employer really
understood how long term disability benefits are calculated and paid? Would an
employee make a partial or full payment toward the premium? Is the insurance
reasonably priced? Would an employee purchase an individual disability policy instead?
Maybe but maybe not? Most employees and probably many HR departments do not
really consider the minimal amount of coverage group long term disability insurance
provides when off sets are deducted.
The Standard of Proof Facing a Long Term Disability Claimant
Substantively and Procedurally.
1. No jury trial.
2. Rarely even a jury waived trial. In some instances, Courts have been willing to
hear limited testimonial evidence on complicated medical issues.
3. Extremely limited ability to add information that supports the claimant’s
entitlement to benefits based on information gathered after the commencement of
litigation.
4. Often minimal deference granted to decisions as to impairment by other
administrative law bodies such as Workers’ Compensation Judges, or
Administrative Law Judges making Social Security Act determinations. The usual
reason for not considering the opinion is that the insurance policy has a different
definition of disability which in reality is most often broader than the Social
Security Act definition of disability.
5. Extremely limited discovery. Attempts to take depositions of claims personnel,
file review doctors, DME reviewers usually fail. The most fertile ground for
discovery is currently “financial conflict” which means how much and how often
is the insurance company paying a particular doctor and the doctor’s medical
review company.
6. No cross examination of insurance company personnel and their “independent
medical examiners” or “peer review” filed examiners.
7. When reviewed deferentially, the insurer will prevail if its decision was
“reasonable” based on the evidence in its file. The insurance company’s decision
can be wrong but so long as it is reasonable based on the file information the
insurer will win.
8. In general, Federal Rules of Evidence have extremely limited application. This
can be a benefit, because if a claimant submits something to the insurer and it is in
the insurance company file, that information will be in front of the Court.
Conversely, insurers routinely use doctors, vocational personnel, claims people
who are routinely offering opinions as to impairment that could never withstand a
Daubert attack as to the reliability of their opinion.
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